Contagion Effects of Subprime Crisis: A Singapore Perspective Seow Eng ONG and Hui Pin TAY
Introduction • The U. S subprime market crisis (SPC) started as a US-centric problem § SPC gradually spilled over to the financial sector § Casualties: Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley § International markets tend to react to news emanating from the US as investors price in expectations of how the crisis would affect their respective markets
Impact of SPC events on Spreads
Objective of Study • To examine the contagion effects of news on US subprime crisis on Singapore stocks in general and property stocks in particular. • Identify US subprime crisis related news events • Evaluate the impact of news event on Singapore stocks • Broad market – Straits Times Index (STI) • Property / Real Estate stocks (SRE) • Real Estate Investment Trust (SREIT)
Some prominent names • Bear Stearns • Lehman Brothers • Merrill Lynch • Morgan Stanley • Goldman Sachs • Fannie Mae & Freddie Mac • AIG • UBS
Methodology • Key word search from Financial Times (London-based) via Factiva • Period: Sep 2007 through Aug 2008 • Stock data from 2005 – 2008 • Events are classified as good news or bad news
Timeline • The day starts in Asia • Events from US on day t-1 get reported on day t but affect Singapore stocks on day t
Note: • US stock returns (t-1) affect SIN stock returns (t) • SRE and SREIT returns could be affected by overall SIN stock returns (STI) • Dummy variables denoting good and bad news (Dg and Db)
Distribution of Events News Days Average returns (STI) Average returns (SREITs) Average returns (S&P 500) Good 19 0. 31% 0. 23% 0. 26% 0. 03% Bad 120 -0. 10% -0. 23% -0. 12% -0. 15% 24 -0. 20% -0. 15% -0. 25% -0. 03% Good and Bad News Collection of news spans from 3 rd September 2007 to 29 th August 2008
Distribution of News Over Time
SIN stock returns (2005 – 2008)
Regression 1 where • RS, t = SIN stock return on day t; S = {STI, SREIT} • RUS, t-1 = S&P 500 returns on day t-1 • Dg, t = dummy variable for good news • Db, t = dummy variable for bad news
Regression 2: orthogonalized residuals • Repeat for returns for SREITs: RSREIT, t
Hypotheses • Expect good (bad) news to have positive (negative) impact on SIN stock return • For broad market (STI) • For property stocks (SRE) • But not necessarily for real estate investment trusts (SREIT) due to defensive nature of REITs
Results: Regression 1 STI SREIT coefficient t stat Intercept 0. 0006 1. 5977 0. 0009* 2. 1436 0. 0005 0. 9426 RUS , t-1 0. 5215* 15. 1323 0. 5284* 12. 9531 0. 4662* 9. 9216 Dg, t 0. 0003 0. 1834 0. 0007 0. 3821 0. 0000 -0. 0226 Db, t -0. 0011 -1. 1914 -0. 0025* -2. 2923 -0. 0013 -1. 0320 R 2 0. 19734 0. 15732 0. 11199 • STI and SRE returns are affected by S&P previous day return • Bad news affect SRE return after controlling for influence from S&P asymmetric effects • SREITs are not affected by SPC news defensive
Results: Regressing SRE and SREIT on STI SREIT coefficient t-stat Intercept 0. 0001 0. 6705 0. 0000 -0. 0769 R S, t 0. 9835* 50. 0817 0. 7791* 25. 8427 R 2 0. 7248 0. 4537 • SRE stock return highly correlated (0. 983) with broader STI market return • SREIT stock return not as highly correlated (0. 779)
Results: Regression 2 SREIT coefficient t stat Intercept 0. 0002 0. 8176 0. 0001 0. 2560 RUS , t-1 0. 0155 0. 6670 0. 0334 0. 9058 Dg, t 0. 0004 0. 4033 -0. 0003 -0. 1679 Db, t -0. 0014* -2. 2868 -0. 0005 -0. 4888 R 2 0. 0062 0. 0014 • Orthogonalized residuals are not influenced by US stock returns (absorbed in STI returns) • Only bad news affect Singapore real estate stock returns (SRE), but not good news • SREITs are not affected by SPC news
Implications • Contagion effects observed: • Global fallout effects of US subprime crisis in 2007 & 2008 felt by Singapore • This is over and above the normal market spillover effects • Asymmetric reaction to bad news • Singapore real estate stocks react to negative US news, but not positive news (even after controlling for STI effects) • Defensive Singapore REITs: immune to US news
Future research • This paper focuses on short term event study of contagion effects arising from US subprime crisis • Longer term effects – snowballing impact on real economy, demand, etc – for future research • Effects for other countries?
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